Later correspondence from Mr Richards acknowledged that there was an agreement in relation to costs, but did not identify its terms.
13 Whilst I regard Mr Jackson as being a much more reliable witness than the defendant, it does not follow that I should conclude from Mr Jackson's evidence of what was said at the meeting of 16 April 2003, that the parties reached an agreement whose effect was to charge the defendant's interest in the proceeds of sale of the Drummoyne property with the amount of his debt to the plaintiffs. First, Mr Jackson does not purport to recall the precise words which were used. In his affidavit he was seeking to recall what was said more than two years previously. I consider that his file note and his correspondence of 29 April give a sounder indication of what was discussed at the meeting of 16 April. In his affidavit, Mr Jackson said that his purpose in drafting the file note of 16 April was to record the estimates of costs which he had given to the client and to record that "Garry Richards would sell the house to pay our fees in the event that he did not succeed or if he did not succeed as well as he thought and was left with paying the bulk of the costs."
14 That evidence, together with the file note and the letter of 29 April, indicates to me that Mr Jackson and the defendant agreed that the defendant would sell the Drummoyne property, if necessary, to put the defendant in funds to pay the fees payable to the plaintiffs. There is no reference in the file note of 16 April to the defendant paying the fees "from my share of the property settlement".
15 In any event, the conversation as deposed to by Mr Jackson referred to costs being paid from the proceeds of a property settlement. That seems to be a reference to a settlement sum that might become payable to the defendant if he won, not to payment out of his share of the proceeds of sale of the house if he lost and the house had to be sold.
16 In the letter of 29 April, Mr Jackson refers to fees being paid within two or three months of the sale of the house. I read that letter as meaning that the fees would be paid two or three months after the house was sold, not that the house would be sold within two or three months of the date of the letter and the fees paid out of the proceeds of sale.
17 The critical question is whether it should be inferred that the parties intended that if the Drummoyne property were to be sold, the defendant's share of the proceeds of sale were to be kept separate from his other assets, and the costs paid from that separate fund.
18 An agreement between a debtor and his creditor that the debt owing shall be paid out of a specific fund coming to the debtor will create a valid equitable charge upon the fund and operate as an equitable assignment of it. (Rodick v Gandell (1852) 1 De GM & G 763 at 777, 778; 42 ER 749 at 754). However, for this principle to apply, there must be a specific fund from which the debt owing is to be paid. In Swiss Bank Corporation v Lloyds Bank Limited [1982] AC 584, Buckley LJ said (at 595):
" If the debtor undertakes to segregate a particular fund or asset and to pay the debt out of that fund or asset, the inference may be drawn, in the absence of any contra indication, that the parties' intention is that the creditor should have such a proprietary interest in the segregated fund or asset as will enable him to realise out of it the amount owed to him by the debtor. "
19 For such a charge to be created by an agreement to pay a debt out of a fund to come to the debtor, the parties must have agreed that the debtor would keep the fund separate from his other assets. (Moseley v Cressey's Co (1865) LR 1 Eq 405 at 409).
20 There was no express agreement between the parties that if the Drummoyne property were sold, the defendant would keep his share of the proceeds of sale in a separate account which would be applied to meet his debt for costs. If the parties intended or assumed that the defendant could add his share of the proceeds of sale to his other assets, by, for example, crediting them to his existing bank account, or that he could use them to reduce any overdraft to the bank, or to discharge other debts, any such intention or assumption would be inconsistent with the plaintiffs having a charge over the proceeds. Very slight differences of language could produce different legal outcomes. If the defendant said, "I will pay your costs out of the proceeds of sale", that might imply that the proceeds of sale would be kept separate and the debt would be paid from the separate fund. On the other hand, if the defendant said "I will pay your costs when I receive the proceeds of sale", no such implication could be drawn.
21 I have no doubt that Mr Jackson was a truthful witness. However, considering his evidence as whole, including his contemporaneous correspondence and file note, his affidavit evidence as to his purpose in preparing the file note, his oral evidence that his file note summarised the matters of importance which were discussed, and taking into account that his affidavit was prepared more than two years after the conversation in question, that he did not profess a precise recollection of the words used, and that his affidavit did not in terms refer to the costs being paid out of the proceeds of sale of the Drummoyne property, I am not satisfied that there was an agreement that if the Drummoyne property had to be sold, the defendant's share of the proceeds of sale would be kept separate and used so far as necessary to pay the plaintiff's costs. Rather, the parties contemplated that if the defendant were not successful in the litigation and the property had to be sold, the defendant would then be in a position to pay the plaintiff's costs as a result of his assets being augmented by the proceeds of sale. Whether that contemplation proved to be accurate would depend upon the amount of the debt, the extent of the defendant's other debts, and his other assets. For these reasons, I do not accept that the plaintiffs are entitled to a charge over the defendant's share of the proceeds of sale of the Drummoyne property.
"Fruits of the Litigation" Lien
22 The basis upon which, at common law, a solicitor is entitled to recover his costs and disbursements from money recovered for a client was authoritatively stated by Jordan CJ in Ex Parte Patience; Makinson v The Minister (1940) 40 SR (NSW) 96 (at 100) as follows:
" A solicitor has no lien for his costs over any property which has not come into his possession. If, however, as the result of legal proceedings in which the solicitor has acted for the client, the client obtains a judgment or award or compromise for the payment of money, although the solicitor acquires no common law title to his client's right to receive the money or to any part of that right, he acquires a right to have his costs paid out of the money, which is analogous to the right which would be created by an equitable assignment of a corresponding part of the money by the client to the solicitor. That is to say, the solicitor has an equitable right to be paid his costs out of the money; and if he gives notice of his right to the person who is liable to pay it, only the solicitor and not the client can give a good discharge to that person for an amount of the money equivalent to the solicitor's costs. … "
23 Although Sir Frederick Jordan deprecated this right being described as a lien, that description is sanctioned by long usage (Firth v Centrelink (2002) 55 NSWLR 451 at 467). The lien is called a particular lien, to distinguish it from a general or retaining lien where the solicitor has possession of his client's property obtained in the course of acting as the client's solicitor.
24 The plaintiffs claim to be entitled to a "fruits of the action" lien in respect of the defendant's share of the proceeds of sale of the Drummoyne property, from which they claim to be entitled to payment of their costs. It is necessary to return to the facts in a little more detail.
25 The defendant and Ms Rose owned the Drummoyne property as tenants in common in equal shares. In the Property (Relationships) Act proceedings, Ms Rose sought orders for the sale of the Drummoyne property. She sought orders that 65% of the net proceeds of sale of the property be paid to her, that there next be paid from the net proceeds such amount as was necessary to discharge a loan from her mother for the payment of the mortgage over the property, and the balance be paid to the defendant. She claimed that her mother paid $3,122.40 to Westpac Banking Corporation on account of three months' of mortgage arrears.
26 The defendant resisted the order for sale of the Drummoyne property. He sought orders that he pay Ms Rose 35% of the value of the Drummoyne residence, and she be ordered to transfer her interest in the property to him.
27 Ms Rose sought orders that the business of A Creative Cuisine, Sydney Pty Ltd be sold and that it and ACC Catering Australia Pty Ltd be wound up. She did not seek any orders varying the parties' entitlements as shareholders to participate in the return of assets on the winding-up.
28 There were three shares in A Creative Cuisine, Sydney Pty Ltd. One was held by Ms Rose, one by the defendant, and one by a Mr Clark. The defendant proposed orders that he transfer his shares to the plaintiff and that he be paid a sum of money in lieu of dividends and other benefits of which he claimed he was deprived and which he claimed he ought to have derived from the company. He also sought an order that he be paid a sum of money which the plaintiff withdrew from a bank account, which, the Master inferred, was a bank account held on behalf of the company.
29 The May 2003 hearing date was vacated. The matter was heard in November and December 2003. The Master recorded that during closing addresses the plaintiff had abandoned her claim that part of the net proceeds of sale of the Drummoyne property be applied to discharge the alleged loan from her mother applied towards payment of the mortgage. He found that the contributions of the parties to the Drummoyne property should be recognised by the plaintiff having an interest therein of 60%, whilst the defendant should have an interest therein of 40%. (Rose v Richards [2004] NSWSC 315 at [60]). He found that if the parties could not agree upon a valuation of the property then orders would need to be made for its sale. The plaintiff upon sale would be entitled to 60% of the net proceeds and the defendant to 40%. In relation to the affairs of the two companies, the Master found that the plaintiff should be entitled to 60% of the assets to which the parties should together become entitled on a distribution on a winding-up, whilst the defendant should be entitled to 40%. The Master did not make the orders which the defendant sought claiming a payment in respect of benefits of which he was allegedly deprived and payments referable to the withdrawal of moneys from the company's bank account. The Master found that such transactions would be brought into account upon the liquidation of the companies and be reflected in the ultimate disposition of any assets among the shareholders. He ordered that the defendant pay two-thirds of Ms Rose's costs.
30 Final orders were not made until 19 August 2004. By that time the plaintiffs had ceased to act for the defendant. The orders included orders that the parties do all that was necessary to cause the Drummoyne property to be sold. The property was sold. The net proceeds of sale totalled $497,911.27. $298,746.76 was paid to Ms Rose. $199,157.31 was paid to the defendant, although, pursuant to the orders made by Campbell J on 10 September 2004, $137,914.14 of the proceeds was paid into a controlled interest-bearing account in the joint names of the defendant and a firm of solicitors.
31 Initially, the plaintiffs submitted that they were entitled to a lien which secured an amount representing the benefit derived by the defendant from the defence of Ms Rose's claim, being an amount representing 5% of the proceeds of sale of the Drummoyne property, plus $3,122.40. This calculation was based on Ms Rose's claiming 65% interest in the proceeds of sale plus a direction that $3,122.40 of the proceeds of sale be applied to discharge the debt allegedly owed to her mother. Five per cent of the net proceeds of sale was $24,894.66. Thus the plaintiffs initially claimed to be entitled to security by way of lien over the sum of $28,017.06, representing the extent to which the defendant successfully resisted Ms Rose's claim.
32 Ultimately, the plaintiffs submitted that all of the defendant's share of the net proceeds of sale was property over which they were entitled to assert a lien for their proper costs and disbursements. For this submission the plaintiffs relied upon the judgment of Sheller JA, with whom Meagher JA agreed, in Grogan v Orr [2001] NSWCA 114 at [62].
33 If the defendant had succeeded in the Property (Relationships) Act proceeding he would have obtained an order that Ms Rose transfer her share of the Drummoyne property to him upon payment of a sum of money against which the defendant might have been entitled to set off amounts which he otherwise claimed from her relating to her dealings with the companies. Had he been successful, the Drummoyne property would not have been sold. There would have been no fund in respect of which the plaintiffs would be entitled to a lien. The plaintiffs would not have been entitled to a lien over Ms Rose's interest in the Drummoyne property which, if the defendant had succeeded, would have been transferred to him. (Shaw v Neale (1858) 6 HL Cas 581 at 589, 592, 601-602; 10 ER 1422 at 1426, 1427, 1431). It was there held that a solicitor was not entitled to a lien over an estate which the client recovered through the efforts of the solicitor. Most of the argument in Shaw v Neale concerned priorities between charges which two solicitors had obtained from their hapless client, whose estate had been recovered through the efforts of one of them. It was submitted that a solicitor had a lien on an estate recovered for the amount of his costs expended in its recovery, just as he would have been entitled to a lien on a fund in court. The submission was somewhat peremptorily rejected during argument, Lord Wensleydale and Lord St Leonards saying they had never heard of such a proposition at law or in equity. (6 HL Cas at 588-589, 592; 10 ER at 1426, 1427). The reasons given by Lord Chelmsford LC for rejecting the claim were not very satisfactory. His Lordship denied that there could be any lien upon property unless it is in the possession of the party who claimed the lien. As the solicitor was not in possession of the estate, he was not entitled to a lien upon it. (6 HL Cas at 601-602; 10 ER at 1431). However, whatever might be said about this reasoning, the decision settled the law on the point.
34 In Savage v James (1875) 9 IR Eq 357, the Vice-Chancellor in Ireland rejected a claim that a solicitor was entitled to a lien over silverware recovered by compromise of a suit, saying (at 359):
" There is no question that, if there had been a money fund realised in this suit, he would have had a lien upon it for his costs incurred in realising it, always assuming - as he is at liberty to assume for the purposes of the motion - that there is any sum due to him; but I am at a loss to see how the principle applies to property not in Court, nor proposed to be brought under its control. Except in the case of a fund in Court there can be no lien, for in other cases lien must be coupled with possession. "
35 In response to Shaw v Neale, there was introduced in the United Kingdom s 28 of the Solicitors Act 1860, 23 and 24 Vic C.127. (North v Stewart [1890] AC 452 at 457). That section provided that in every case in which an attorney or solicitor should be employed to prosecute or defend any suit, matter or proceeding, the court could declare such attorney or solicitor to be entitled to a charge upon the property recovered or preserved, and upon such a declaration being made such attorney or solicitor should have a charge upon and against and a right to payment out of the property, of whatsoever nature, tenure, or kind the same might be, which should have been recovered or preserved through the instrumentality of any such attorney or solicitor, for the taxed costs, charges and expenses of or in reference to such suit, matter or proceeding.
36 In 1932, this section was replaced by Act 22 & 23 George V c 37, s 69 which altered the form of the previous s 28, but not its substance. In 1935, the Legal Practitioners' Act 1898 (NSW) was amended and a new s 39A, based on the English s 69, was inserted, which read in part:
" (1) Any court in which a solicitor has been employed to prosecute or defend any action, suit, matter or proceeding, may at any time by order declare the solicitor entitled to a charge on the property recovered or preserved through his instrumentality for his taxed costs in reference to that action… "
37 That Act was repealed by the Legal Profession Act 1987, s 214 and Schedule 1. Section 39A of the Legal Practitioners Act 1898 was not re-enacted. In the Minister's Second Reading Speech on the Legal Profession Bill the Minister said:
" The second departure from the existing legislation relates to charging orders. Provision exists for any court, in which a solicitor has appeared in an action on behalf of a client, to declare that the solicitor is entitled to a charge on property recovered or preserved for the client as a result of that action, pending recovery by the solicitor of his costs. This provision has been deleted from the bill because of the unnecessary burden it places on clients who find their properties subjected to such an order, particularly considering the normally small amount claimed by the solicitor relative to the whole of the property due to the client. "
38 The repeal of s 39A of the Legal Practitioners Act 1898 did not affect the rights which a solicitor has for security for his costs and expenses at common law or equity. However, it is important to distinguish authorities which were based upon the statutory right to a charging order for property recovered or preserved through the instrumentality of the solicitor, from the authorities dealing with a solicitor's "lien".
39 There were numerous differences between the statutory right to obtain a charging order and the common law "fruits of litigation" lien. (See Atkinson, Solicitors' Liens and Charging Orders, 1905, page 9). Three features about the statute to be noted are that the statute referred to property of any kind, thus dealing with the situation revealed in Shaw v Neale; the statutory charge only came into existence upon its being declared by a judge, whereas the "lien" arises automatically; and the statute covered property "recovered or preserved".
40 The reason the lien exists was explained by Lord Kenyon ChJ in Read v Dupper (1795) 6 TR 361 at 362; 101 ER 595 at 596;
"… that the parties should not run away with the fruits of the cause without satisfying the legal demands of his attorney, by whose industry, and in many instances at whose expense, those fruits are obtained ."
41 It would be paradoxical if the plaintiffs, because they were unsuccessful in acting for the defendant in resisting Ms Rose's demands that the property be sold, were entitled to a lien to secure their proper costs, when they would not be so entitled had their efforts for their client succeeded. A claim which produces this outcome, to the potential detriment of the other creditors of the defendant, should be examined carefully.
42 As explained by Jordan CJ in Ex Parte Patience; Makinson v The Minister the solicitor's right arises where "the client obtains a judgment or award or a compromise for the payment of money". In other words, the litigation must bear fruit. I do not think it can be said in this case that the client, that is the defendant, obtained an order for the payment of money. The order directing the sale of the property was not obtained by him. It was obtained by Ms Rose over his resistance.
43 The plaintiffs submitted that it was through their efforts that part of the defendant's interest in the subject property was preserved, and this resulted in his receipt of money. They relied upon the decision of the Court of Appeal in Grogan v Orr [2001] NSWCA 114 as authority that all of the defendant's share of the proceeds of sale was property to which the "lien" attached.
44 In Grogan v Orr, the respondent, Mr Orr, had acted for a husband in proceedings in the Family Court against his wife. It appears that the parties owned four parcels of land, one of which was a farm at Tyagarah, near Byron Bay. The client had a 60% beneficial interest in that property. The other 40% was beneficially owned by members of his family and the children of the marriage. The Family Court declared that as between the client husband and the wife, the client husband was absolutely entitled to the whole of the 60% of the net proceeds of sale of the Tyagarah property. It also ordered the wife to pay to the client by way of property settlement the sum of $64,000 and interest. It does not appear from the judgment, which party had sought an order for the sale of the farm. Powell JA concluded from the reasons of Moss J in the Family Court that the wife made no claim to have the client's interest in the farm brought to account and apportioned in her favour, but only a claim to retain the former matrimonial home and certain items of personal property. Dealing with the claim for a lien, his Honour applied a statement in Cordery on Solicitors, 8 ed at p 250 that:
" A solicitor has at common law a 'lien' over property recovered or preserved or the proceeds of any judgment obtained by his work on his client's behalf for the costs incurred thereby which have been authorised by his retainer. "